Estimating the Optimal Hedge Ratio in the Indian Equity Futures Market
IUP Journal of Financial Risk Management, Vol. 6, Nos. 3 & 4, pp. 38-98, September & December 2009
Posted: 7 Jan 2010
The present study attempts to suggest an optimal hedge ratio for Indian traders through the examination of three indices, i.e., Nifty, Bank Nifty and CNXIT, and 84 most liquid individual stock futures traded on the National Stock Exchange of India, over the sample period January 2003 to December 2006. The present study compares the efficiency of hedge ratios estimated through OLS, VAR, VECM, GARCH(p,q), TARCH(p,q) and EGARCH(p,q) in the minimum variance hedge ratio framework, as suggested by Ederington (1979). The Findings of the present study conform to the theoretical properties of futures markets and suggest that unconditional hedge ratio, after controlling for basis risk, outperforms the conditional hedge ratio. The results favor the hedge ratios estimated through VAR or VECM because both the markets are cointegrated in Engle and Granger (1987) framework, and the findings are consistent with that of Alexander (1999).
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